Court Tells Omega Copyright Is Not A Sword; Rejects Attempt To Control Grey Market As Copyright Misuse

from the well,-look-at-that dept

You may recall our earlier stories concerning the legal fight between Costco and watchmaker Omega. In an attempt to stop grey market (legal, official products, but resold into a market not intended by the manufacturer) sales of one of its watches, Omega put a tiny 0.5cm engraving on the back of its watches, and claimed copyright on it. This had absolutely nothing to do with the incentive to create that tiny engraving, or because that engraving had value or was special in any way. It served one purpose only: to try to abuse copyright law to control the market.

Omega then claimed that Costco selling (legitimate) secondhand Omega watches that were bought from other sources was copyright infringement. We thought this was a crazy claim and pointed out two problems with it under the law. The first was that it seemed like copyright misuse, and second that it appeared to violate the first sale doctrine, allowing you the right to sell copyright-covered products you legally bought. The district court tossed out the case on the first sale question, but unfortunately, the appeals court overturned, with really convoluted reasoning. Since, US copyright law says first sale rights apply to all products "lawfully made under this title," Omega argued, and the court agreed, that objects made outside the US were not "made under this title," and thus had no first sale rights. It's pretty ridiculous that the court would let that go forward, but to make matters worse, the Supreme Court totally punted and just let the appeals court ruling stand.

But... the case wasn't over just yet. The appeals court and the Supremes were just focused on the narrow question of if the First Sale doctrine applied. So the case went back to the district court... and once again, the court has dumped the lawsuit... and went with the other big problem we saw with Omega's sneaky little plan: copyright misuse. This was a bit of a surprise. You don't see "copyright misuse" cases that often, and it's even rarer when that argument succeeds. But the judge was pretty clear.

Omega concedes that it decided to affix a new copyrighted design to the reverse side of its watches to take advantage of copyright law's importation limitations. In other words, Omega used the defensive shield of copyright law as an offensive sword.

The Ninth Circuit adopted the Fourth Circuit's definition of copyright misuse.... The Fourth Circuit held that copyright misuse occurs when "copyright is being used in a manner violative of the public policy embodied in the grant of copyright.".... The Ninth Circuit later clarified that "the misuse defense prevents copyright holders from leveraging their limited monopoly to allow them to control areas outside of their monopoly."...

Here, Omega concedes that a purpose of copyrighted Omega Globe Design was to control the importation and sale of its watches containing the design, as the watches could not be copyrighted. Accordingly, Omega misused its copyright of the Omega Globe Design by leveraging its limited monopoly in being able to control the importation of that design to control the importation of its Seamaster watches.

It's nice to see copyright misuse actually being used in court... and even nicer to see it succeed (so far). It would be nicer, still, if more courts actually started to use that Fourth Circuit definition of copyright misuse: "violative of the public policy embodied in the grant of copyright." Considering how many copyright cases these days would qualify as copyright misuse under those terms, it's a shame that the courts haven't declared copyright misuse more frequently.

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I've never heard it used that way, I guess (although 4-4 ties are rare enough that no terminology is likely to be "common" in reference to them).

Anyway, since "punting" is often used to refer to a denial of certiorari or a decision that avoids the critical issues (rather than reaching them, but tying on what to do about them), I thought it had the potential to mislead.

The copyright misuse doctrine seems applicable, but the district court's "sword/shield" language doesn't make sense to me. Of course copyright is a sword. It provides a right to sue people, not a defense to suit.

Anyway, not sure why Mike would say the Supreme Court punted when it did everything it could do.

Re: Punting

One could make the argument that a 4-4 tie is a punt since this was a question of law that had worked it's way through the system all the way to the highest court of the land (and the court had thought it important enough to accept the case. If it was that important perhaps they should have worked harder at reaching a decision, indeed if they had "done everything they could" it is reasonable to believe they would have reached a decision.

note: I'm not saying or implying they didn't work hard, I'm simply pointing out why some might consider it a punt since that seems to be your point of fixation regarding the article.

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Actually, the language does not make any sense since a right under copyright law is most definitely something that is wielded as a "sword" before a court of law.

The court's poor choice of words notwithstanding, it is clear, from Omega's own admissions, that it was attempting to use copyright law to stifle the sale of an article unrelated to the copyright in any way other than serving as the "canvas" upon which the work was fixed. Had the work been an integral part of the article (e.g., a unique and original watch face), then perhaps there would be merit to Omega's claim. The facts here, however, clearly cut in the opposite direction.

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I'd agree with "poor choice of words" but not with "does not make any sense" - I think the AC below explained it well, at least in terms of how the court meant it here: copyright is used to defend your monopoly, not to aggressively expand it. ThoughI suppose you do wield copyright like a sword, you only (in theory) do so after someone else has drawn their sword against you by infringing. You aren't supposed to brandish it wildly and go running into the fray of adjacent markets.

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Of course copyright is a sword. It provides a right to sue people, not a defense to suit.

But it is to be used to defend creative works from being copied. By smuggling a little bit of copyright into a place it didn't belong they attempted to use copyright law to attack another business. In so doing they were not defending the copyright on the engraving but attacking Costco's business.

If applying a tiny copyrighted engraving to the back of a watch, and licensing the copyright rather than selling it is legal, would taking a Dremel and erasing the engraving make selling the watches legal again?

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Had Costco simply removed the engraving from the watch case, it would have been free to sell the watches in the US without any hindrance.

One thing to keep in mind though with respect to "grey market" goods, the warranties are usually "international", and not "US". Not a big deal unless the watch goes bust and has to be sent back for repair. In the case of the Costco watches that would be Switzerland.

I happen to have an Omega with a US warranty, so when it stopped working some time ago I was able to have it repaired on this side of the Atlantic. However, given the price differential between the Costco price and the official US price, I very well may have opted for the lower price...international warranty notwithstanding.

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Omega makes some of the clunkiest pieces of shit you could ever burden your wrist with. I haven't bought a watch costing more than $100 in thirty years. They all break, and they all can't be fixed at a price anyone would consider reasonable, so they're all throwaways. Even after they "fix" them, they never keep accurate time again, or they break again.

There are times (perhaps almost always is more accurate) when those who may speak in favor of copyright law conceptually are vilified as copyright maximists, suggesting that more is always better and calculated to keep lawyers employed. It is oftentimes said that more copyright is better in their view since their livelihood bias them in that direction.

Merely FYI to those who may believe this to be the case, it is worthwhile to note that those who deal in patent, copyright, trademark, unfair competition, etc. laws, while they work with what is presented to them by statute, do not necessarily subscribe to "more is better". Within professional circles counsel hold markedly differing views, many of which reflect some of the concerns expressed here somewhat regularly.

One example, in the case of Omega v. Costco, is as follows (a submittal in an article concerning the case at Patently-O):

For those unfamiliar with the facts in the case, Omega, in an attempt to thwart importation into the United States, came up with the idea to create a logo, register the logo with the US Copyright Office, engrave the logo on each of its watches, a very small, tiny engraving on the back of the watch case, and then argue that importation of the watches into the US was also the importation of a copyrighted work into the US without the permission of the copyright holder.

Crudely stated, in this case the Omega watches are nothing more than the "canvas" upon which the copyrighted work is applied.

I have to wonder, the purported legal issues aside, if this is really what Article 1, Section 8, Clause 8 had in mind in relation to promoting the progress of science? Personally, I believe the answer should be a resounding "No". The Copyright Act of 1790 led off with "An Act for the Encouragement of Learning", the very same preface to the UK's Statute of Anne. How a logo purposely added to shoe horn a utilitarian (and unprotected" article) to fit within the literal language of Title 17 promotes "learning" eludes me entirely.

Quite some time ago I responded to an article here that copyright misuse in the matter then being discussed was a viable equitable defense that if successfully asserted would almost certainly render a copyright null and void. It is reassuring to see that the defense, like many other rules of law adopted from patent law, still retains vitality.

for such information as it may provide, the 9th Circuit's description of the misuse doctrine is the correct one. Misuse involves attempting to take those rights secured by law, and then attempting to expand them by tying those rights to the sale of unrelated goods. Morton Salt, the most cited example, involved a patented device for treating salt, but the patent holder then attempted to expand the rights granted by its patent by conditioning the use of the patented device to only salt purchased from Morton, a classic case of an unlawful tying arrangement. As a consequence, Morton's patent was reduced to the equivalent of note paper since it was no longer enforceable against any party who would have otherwise infringed the device covered by the patent. What is a shame is that the concept of "misuse" is not widely appreciated or known to many attorneys who engage in litigation of this type.

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^^

Well I'll be a three horned toad. That's exactly what I was gonna say. Hit my delete bar and my whole danged reply box was gone. Ends up being the same basic thing though don't you think? You wanna come over to my house and play legos?

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I don't think that the issue is that misuse is not a widely known. The facts and circumstances are rarely there for the defense, though it is quite often pled as an affirmative defense.

Also, just to clarify, there is a difference between the results in patent and copyright misuse. Patent misuse can render a patent unenforceable; copyright misuse is largely a shield to a claim of infringement. In other words, I'm not familiar with a court saying that copyright misuse negates the underlying copyright such that any third party can use it without fear on copyright infringement -- other than perhaps in the misused manner.

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Circumstances as to which misuse may apply arise much more often than one might think. I can scarcely begin to count the number of times I have read previously negotiated licensing agreements containing provisions where clearly the license was predicated on a grant in exchange for the licensee's agreement to refrain from taking certain actions that are fully consistent with, and actually encouraged, by law.

In virtually all such instances the licenses were prepared and negotiated by persons lacking a firm foundation in the vagaries of copyright law, and as a consequence clearly failed to appreciate the import of the misuse doctrine to the license at hand.

I should clarify a point I made above with regard to the 9th Circuit's interpretation of the doctrine. Morton, a patent case, clearly involved a tying arrangement, which raises antitrust issues. However, as courts have pointed out one can engage in the act of misuse without having engaged in an action unlawful under antitrust law. On occasion I have during my review of licensing terms noted provisions in patent licenses where a licensing provision was tied to a reciprocal promise that the licensee would refrain from making improvements to what was being licensed, or was foreclosed from activities such as reverse engineering that would otherwise be perfectly legal in the absence of the license provisions. In each such circumstance I red-lined the provision for the simple reason that it foreclosed an otherwise perfectly legal activity. Yes, there may be certain circumstances where such provisions may not create a misuse problem, but the issue nevertheless arises with alarming frequency.

As for misuse being an affirmative defense limited only to the case at bar, I have not as yet read a case where a classic case of misuse resulted in a decision limited to just the parties involved in the litigation. One does not have to be a party to a specific transaction to raise and prevail on the defense in a later lawsuit.

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In each such circumstance I red-lined the provision for the simple reason that it foreclosed an otherwise perfectly legal activity.

Aren't otherwise legal activities the only ones prohibited by contract? If it's already prohibited by statute, there's no need to prohibit it in the contract as well. Non-disclosure agreements, for example, have as their sole purpose prohibiting activities that would otherwise be completely legal.

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Let me give you a real life example.

A company is licensing a third party under one or more patents. No confidential information is being exchanged. It is just a "bare" license.

The license contains a provision that the licensee is being granted an exclusive license within a defined field of use. Hence, the licensee is the only one authorized to exclude others, including the licensor, from making, using, selling, offering for sale, or importing the claimed invention with the defined field of use.

The licensor, in a fit of stupidity, insists that the licensor agree that it will not engage in any activity associated with making any improvements to the invention.

Here we have now created a problem. The world at large is perfectly free to craft improvements (which is one of the fundamental purposes underlying patent law), but the licensee is now the only one in the world precluded by the license from doing so. Since the right to prevent others from improving upon an invention is not one of the exclusive rights accorded by our patent laws, the licensor has clearly overstepped the bounds of the patent grant. By insisting upon such a provision the licensor has set itself up for a future patent misuse defense if for some reason the licensee violates the terms of the license.

This is precisely why I red-lined the provision in the draft license.

Turning to your NDA example, that is a materially different situation. There one or both parties are exchanging confidential information that is otherwise unknown to the public. We are not dealing with patents or copyrights, so the rights accorded by each do not come into play.

Re: SHEER MADNESS

Actually, the district court reached what should have been a much simpler conclusion: that the international sale was a first sale. The only problem was that the appellate courts went ahead and messed up the first-sale doctrine as it relates to goods manufactured/sold internationally.

Coming to a copyright-misuse conclusion first probably would not have saved anyone any time.

"lawfully made under this title,"

That's a really disturbing undermining of first sale rights. Owners of anything not manufactured in the US are not allowed to resell their property? Have I got that right? (find something on your desk right now that was made "under this title" I bet it's pretty tough)

Also wasn't the design's copyright created "under this title" in the US to have a US Copyright applied to it? There's some really messed up semantics going on here that we obviously need to have sorted out.

Re: "lawfully made under this title,"

Owners of anything not manufactured in the US are not allowed to resell their property? Have I got that right?

No, it's based on where the first sale took place, not where it was manufactured, and it only applies to copyrighted items. So probably books or movies sold overseas then imported would be the main items impacted. I still don't like the decision though.

Under this title?

"Lawfully made under this title." That means that the manufacture was not illegal under this title. "Under this title" is ONLY there because otherwise some company would claim that they once recieved an OSHA complaint and therefore First Sale no longer applies.

Many are absolutely overpriced, some exorbitantly so. Nonetheless, there are some that are so unique they have to be admired for their ingenuity. My favorite has always been those manufactured by Quinting. The first time I saw one all I could do was scratch my head and ask "How do they do THAT?!?". The below links a photo that shows what I mean.